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Chinese miner Zijin's overseas expansion bolstered by cash deals

China's Zijin Mining Group Co. Ltd. has used the advantage of cash purchases to help expand its global footprint, including a recent offer to buy what it said could be the largest independent gold mine in Colombia when it starts operating in 2020.

The company's early December offer to buy Canada's Continental Gold Inc. in an all-cash deal worth about US$1.24 billion will provide access to the Buritica mine, where phase-one operations are expected to produce an average annual of 7.8 tonnes of gold and 14.5 tonnes of silver over 14 years.

Overseas gold expansion

Zijin Mining made several large purchases in recent years in its bid to become a large global miner. With the addition of Buritica, it could have nearly three-quarters of its gold reserves outside of China, according to an S&P Global Market Intelligence analysis. Before the deal, about 66.5% of Zijin Mining's gold reserves and resources were overseas.

The deal would increase the company's gold resources to more than 2,000 tonnes, compared to the 1,728 tonnes defined in its 2018 annual report. It also expects gold output to jump 20% when Buritica reaches full capacity, excluding refined production, Zijin Mining said in the deal announcement.

Zijin Mining's cash advantage

The company's access to cash and willingness to deploy it gives Zijin Mining an edge when it comes to making deals, analysts said. Haywood Securities analyst Kerry Smith noted that in contrast to the Chinese company, many other gold miners have been focused on debt repayment and asset divestment in recent years. That has given companies such as Zijin Mining an opening to make attractive offers such as its all-cash for Continental Gold, according to Smith.

"The only other miners that have been able to raise cash easily are the Australians," Smith said in an interview. "Recently Saracen Mineral Holdings Ltd. raised [about] US$750 million to buy Barrick Gold Corp.'s 50% of Kalgoorlie. Northern Star just bought the other 50% from Newmont Goldcorp Corp. and announced a A$765 million equity raise, plus A$480 million in debt."

Cash has also helped Zijin Mining outbid competition in multiple-offer situations, Cormark Securities analyst Stefan Ioannou noted, pointing to Zijin's acquisition of Nevsun, where it put more cash on the table than Lundin Mining Corp.

"Cash is always king when it comes to getting a deal done," Ioannou said in an email. "In the case of Nevsun, it definitely allowed the Chinese company to come over the top with a premium bid and squash hostile interest from Lundin Mining."

Its deal-making, aided by cash resources, has also given Zijin Mining a strategic advantage over other miners to invest in the sector with a longer-term view, Franco-Nevada Corp. CEO David Harquail told S&P Global Market Intelligence.

"Its deals are not immediately accretive but will ultimately prove smart," Harquail said in an email.

Harquail said Zijin Mining has been able to invest counter-cyclically, like royalty and streaming companies, which have emerged as a key source of financing in the mining sector. "The challenge for the Western-listed companies is that they need to deliver nearer-term results for their investors," Harquail said.

Past cash deals

Compared to other gold company deals announced or completed in 2019, Zijin Mining's deals stand out for relying on cash rather than large debt or equity issuances, though an early June report from Moody's Investors Service flagged financial risks related to debt the company has taken on to fund capital investments tied to large acquisitions. Moody's estimated that Zijin Mining has spent more than 20 billion Chinese yuan acquiring mining assets over the past five years.

Based on values as of the deal announcement, Zijin Mining would have enough cash to fund about 81% of the acquisition of Continental Gold, Market Intelligence data shows. While it has been dubbed an all-cash deal, "Zijin plans to fund 70% of the purchase using cash on hand and syndicated loans. The remaining 30% equity will be bought by financial investors," S&P Global Ratings credit analyst Allen Lin wrote in a Dec. 6 research note.

The US$12.9 billion deal that saw U.S.-based Newmont Goldcorp acquire Canadian miner Goldcorp Inc. in April had less than 1% of the transaction value funded by cash, while the rest was funded with debt assumed and common stock issuances.

Market Intelligence records show at least seven mining acquisitions by Zijin Mining since 2012 including the Continental Gold deal. Five of the deals used cash to fund at least 97% of the transaction value. For the US$1.4 billion acquisition of Canadian copper producer Nevsun Resources Ltd., Zijin Mining estimated it had enough cash to fund about 97.8% of the transaction value. In addition to the five deals, Zijin Mining made a US$1.26 billion investment in 2018 to buy a 63% stake in Serbia's largest copper mining and smelting complex, RTB Bor Group d.o.o.